What is True Sale Based Financing
True Sale Based Financing (TBF) is a transaction where cash-generating assets (accounts receivable, annual contracts, multi-year contracts, etc.) are fully transferred from a seller to a buyer for a purchase consideration.
In contrast to both debt-financing, which is treated as a liability on the balance sheet, and equity financing, which increases the total number of shares issued, a TBF causes neither dilution nor debt, and results in direct substitution of assets for instant cash.
A TBF also protects the buyer’s interests by legally isolating the asset beyond the reach of the seller’s creditors and bankruptcy trustees.
How True Sale Based Financing Works
TBF is an innovative way to raise growth capital without any dilution or debt. It has five key characteristics that makes it an attractive option in the CFO’s tool box.
- Improve balance sheet and boost cash flows through a direct transfer of illiquid assets on the balance sheet to a buyer in exchange for liquid cash. An asset in this context could mean intellectual property, accounts receivables, annual contracts, or multi-year contracts. The fast-forwarded cash flows from the future are recognized in the same quarter as when the TBF transaction is consummated.
- No dilution through issuance of new shares, resulting in no changes to existing shareholders’ ownership.
- No new liabilities on the balance sheet unlike traditional loans (or) conventional revenue based financing.
- Enjoy relatively lower costs of capital from alternative financing vendors offering TBF who may perceive the assets they are buying to be more risk-mitigated. Full transfer of asset’s future cash flows protects the buyer from future claims from seller’s creditors (or) bankruptcy proceedings.
- Flexibility and Choice of Payment Terms: No need for the seller to repay until the customers pay according to their contract terms. This means that the seller has a lot of latitude to cherry-pick the contracts they want to sell —and even the specific future receipts within— based on the quantum and timing of cash flows, and the cash needs of the business over time.
Why TBF matters for public and private companies
For public companies, TBF enables compliance with cash reporting regulations and faster cash conversion. Several US and international stock exchanges mandate quarterly cash flow statements and proof of adequate liquidity, and True Sale of long-term cash generating assets— in exchange for immediate cash—to a company like Ratio is a great tool to stay in compliance. True Sale is also a more pragmatic way to unlock additional liquidity from the balance sheet without taking on new debt or dilution.
For private companies, TBF offers a new source of growth capital that is distinct from venture debt, equity capital, or revenue based financing. It is a new tool in the growth capital tool-kit that provides more flexibility and choice around what contracts to sell to a company like Ratio, and what % of future receipts to sell, depending on projected cash flow timings. With no covenants, restrictions, and less complicated accounting treatments, it is a powerful weapon to use to extend your runway on your terms.